Europe set to rebound despite chaos in Chinese stocks

The coronavirus fears ramped up last week as the death toll increased and so did the number confirmed infections.

Last week the World Health Organisation declared the situation a global crisis – they body changed their opinion seeing as only a week before hand the organisation said it wasn’t a global emergency.

The vast majority of the cases are in China, but the virus has spread to at least 17 other countries. The US has declared it a health emergency. Last week it was confirmed that two people in the UK tested positive for coronavirus. China, the second-largest economy in the world is at the centre of the crisis. Traders were dumping stocks last week on fears the Chinese economy would be impacted by the situation. China is a major importer of commodities such as copper as well as oil – both markets suffered heavy losses recently.

Overnight stock markets in mainland China re-opened after the Lunar New Year holiday. Chinese stocks plummeted in early trading. The Shanghai composite is down in excess of 7.5%. The People’s Bank of China took action to stabilise the markets by injecting $173 billion worth of liquidity into the markets via open market reverse repo operations. Equities in mainland China are off the lows of the session. Despite the chaos in mainland China, the Hong Kong market is slightly higher. The Caixin survey of Chinese manufacturing was released and the reading was 51.1, while economists were expecting 51.3. The previous reading was 51.5.

Equity markets suffered a broad-based sell-off last week as mining, energy, auto makers, and retail as well as travel all stocks lost ground. Dealers are fearful the coronavirus situation will dampen demand for minerals, vehicles, plus western luxury brands. Tourism in China is likely to be curtailed as a number of airlines have suspended flight to the country.

The fear-factor running through stock markets has been pronounced. On Friday, the FTSE 100 fell to a seven week low, the DAX dropped to a level last seen in early January, while the Dow Jones closed below its 50-day moving average. The risk-off strategy prompted a jump in demand for gold as the metal hit a level last seen over three weeks.

Last week the Federal Reserve kept rates on hold, meeting forecasts. The US central bank appears to be content to keep monetary policy on hold for the time being. The latest reading of the core PCE, the Fed’ preferred measure of inflation, held steady at 1.6%, meeting forecasts. In light of the news, the Fed will probably keep rates on hold for some time to come.

The Bank of England (BoE) also kept interest rates on hold, the central bank caught some traders by surprise by voting to 7-2 to keep rates unchanged. On the run up to the meeting there was speculation the bank would cut rates. On Friday night, the UK left the EU, but it entered the transition period – which will last until the end of the year, so the BoE will probably keep on rates as they are until the post transition period relationship has been mapped out.

Between 8.45am (UK time) and 9.30am (UK time) a number of European countries will release their final readings of the manufacturing PMI reports. Italy, France, Germany and the UK will publish their reports, and the economists are expecting 47.5, 51, 45.2 and 49.8 respectively.

At 2.45pm (UK time) US final manufacturing PMI update will be revealed. The level is expected to be 51.7. Shortly afterwards the ISM manufacturing report will be announced, and economists are expecting 48.5.

EUR/USD – has been pushing lower since late December and while it holds below the 50-day moving average at 1.1094, the bearish move might continue. Support might be found at the 1.0900 area. A break above 1.1172 should pave the way for 1.1249 to be retested.

GBP/USD – while it holds above the 50-day moving average at 1.3063, the upward move should continue. 1.3284 might act as resistance. Support might be found in the 1.2900 area.

EUR/GBP – remains in the wider downtrend and if the bearish move continues it might retest 0.8300. A rebound might run into resistance at 0.8600.

USD/JPY – has been pushing lower recently and while it holds below the 50-day moving average at 109.18, the bearish move should continue. 107.65 might act as support. If the wider positive trend resumes, it might retest the 110.00 zone.

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